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canbuywontbuy

Aussie Households Paying More Of Their Household Income In Interest In 2015 Than When Interest Rates Were 17%

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The title will get some boomers scratching their heads no doubt.

Data from the Australian National Accounts, released today (June 3, 2015), show in aggregate, households are paying 4.96% of household disposable income on dwelling interest payments, still greater than the 4.18 per cent recorded in 1989 when mortgage rates were in excess of 17 per cent.

interestpaymentsdwellings_australia_mar2015.png

(click chart to enlarge it)

I thought I'd share this because the Aussie housing market is analogous to the UK housing market over the years.

Also, note that the above chart only refers to interest repayments, not capital repayments - which are clearly way more as a percentage of income in the modern era than they were 20 or 30 years ago.

And another thing - high interest rates meant high savings rates.

Oh, another thing - decent wage inflation through the 80s and 90s versus wage stagnation post early 2000s.

But, hey...."in my day, interest rates were 17%!!11!!!!"

(chart and more info...from here > http://www.whocrashedtheeconomy.com.au/blog/2015/06/adelaide-property-market-denied-jump-start/)

post-39188-0-08767400-1434455150_thumb.png

Edited by canbuywontbuy

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The title will get some boomers scratching their heads no doubt.

But, hey...."in my day, interest rates were 17%!!11!!!!"

No head scratching here but I can imagine the looks on their little faces! Not too hard too understand when they bought houses for 2-3 times the average income and now days most buyers have to service more than double that capital!

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canbuywontbuy, you say

"Also, note that the above chart only refers to interest repayments, not capital repayments - which are clearly way more as a percentage of income in the modern era than they were 20 or 30 years ago."

I wonder if that is true in Australia. I also wonder if it is true here in the UK. For Interest Only mortgages, then the percentage of income on capital repayments is going to be zero.

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The title will get some boomers scratching their heads no doubt.

attachicon.gifinterestpaymentsdwellings_australia_mar2015.png

(click chart to enlarge it)

I thought I'd share this because the Aussie housing market is analogous to the UK housing market over the years.

Also, note that the above chart only refers to interest repayments, not capital repayments - which are clearly way more as a percentage of income in the modern era than they were 20 or 30 years ago.

And another thing - high interest rates meant high savings rates.

Oh, another thing - decent wage inflation through the 80s and 90s versus wage stagnation post early 2000s.

But, hey...."in my day, interest rates were 17%!!11!!!!"

(chart and more info...from here > http://www.whocrashedtheeconomy.com.au/blog/2015/06/adelaide-property-market-denied-jump-start/)

I was reading this the other day and almost put a post up about it myself - it really is an incredible stat, and as you say it should finally shut some boomers up that keep insisting on how tough they had it (wishful thinking actually, I'm sure - after all, they didn't even have iphones!).

The key points are that base rates were 8x what they are now, and the SVR was between 4-5 times what it is now - and yet the interest component alone is currently taking up more than it did then, which implies I guess 4x the capital repayments on top.

And of course, high interest rates imply high inflation - about 12% at the time - so if can tough it out for a few years, and maintain just a zero % real pay increase, then the loan is halved in 6 years..

Having none of that going for them, I wonder if young Aussies (and Brits) realise just how truly stuffed they are?

Another interesting stat that came out this week is that 61% of mortgage finance in NSW (Sydney) went to BTL in April, and 6% to first home buyers. We're still a long way from that over here - about 50/50 isn't it?

Also there is now an extreme amount of "chatter" on Australian news sites - at least one or two articles a day on house prices, many of them desperate buuble-denying ramp pieces. I think its getting ready to blow.. and it could be quite spectacular. Having just returned from 10 years down under I keep an eye on there and here, and Sydney is in full-frenzy and, hard to believe though it is, makes London look relatively sane.

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Also, note that the above chart only refers to interest repayments, not capital repayments - which are clearly way more as a percentage of income in the modern era than they were 20 or 30 years ago.

I think if the total payment was greater then that would have been the headline. When interest rates are higher, the initial capital payment is much lower as the effective return is much greater.

A quick excel calc comparing the first year of 25 year mortgages, a 5% interest rate has a capital repayment 6 x greater than a 17% mortgage. If the interest payment is the same on both mortgages the capital payment is 15 times larger. This multiple reduces with time.

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This is yet another example of the distortion of facts around HPI.

Building more houses will solve the housing crisis, not unless they would cost half the price of a similar existing home.

Prices are high because of demand, there is probably well over three quarters of a million empty homes. I've noticed how some are bought and then left empty.

The truth is historic low interest rates are only just able to support the current market, a couple of years more will lead to HPC.

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I wonder if that is true in Australia. I also wonder if it is true here in the UK. For Interest Only mortgages, then the percentage of income on capital repayments is going to be zero.

IO mortgages are harder to get (I think banks that DO offer them usually require a 40% deposit or so...?)

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A quick excel calc comparing the first year of 25 year mortgages, a 5% interest rate has a capital repayment 6 x greater than a 17% mortgage. If the interest payment is the same on both mortgages the capital payment is 15 times larger. This multiple reduces with time.

Not sure I follow. Yes I get the idea that interest repayments are largely "front-loaded" over the mortgage term, but the point seems moot given that the ACTUAL capital amounts are hugely different when comparing 1989 to 2015 (or am I misunderstanding something?).

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Not sure I follow. Yes I get the idea that interest repayments are largely "front-loaded" over the mortgage term, but the point seems moot given that the ACTUAL capital amounts are hugely different when comparing 1989 to 2015 (or am I misunderstanding something?).

I'm not sure in any case that it would apply. It looks to me as if the figures are a simple average of all mortgage holders' interest payments, and presumably there will be quite a mix of mortgage ages included in the figures. So a simple principal / mortgage_length figure is probably going to be sufficient when considering the principal component of the payment?

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more debt being serviced at lower rates ,less debt being serviced at higher rates whats to understand ?

Edited by longgone

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It also shows you why bank rate is so low and is changed in ever decreasing increments.

I fully expect the next raising in rates in the coming cycle will be in 1/8's of a % rather than the previous low of 25bp and well above the 0.5% and 1%'s of earlier times.

Why? Exactly the same reason - when debts are so high, raising rates by these smaller amounts will likely have the same effect in taking money out of people's pockets and the economy via private bank rates.

fredgraph.png?width=880&height=440&id=MO

https://research.stlouisfed.org/fred2/series/MORTG

If you ignore the Volcker spike as an anomaly, interest rates have been trending downwards since 75. House prices have been going up. The only way to sustain larger and larger debts is by lowering interest rates.

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I was reading this the other day and almost put a post up about it myself - it really is an incredible stat, and as you say it should finally shut some boomers up that keep insisting on how tough they had it (wishful thinking actually, I'm sure - after all, they didn't even have iphones!).

The key points are that base rates were 8x what they are now, and the SVR was between 4-5 times what it is now - and yet the interest component alone is currently taking up more than it did then, which implies I guess 4x the capital repayments on top.

And of course, high interest rates imply high inflation - about 12% at the time - so if can tough it out for a few years, and maintain just a zero % real pay increase, then the loan is halved in 6 years..

Having none of that going for them, I wonder if young Aussies (and Brits) realise just how truly stuffed they are?

Another interesting stat that came out this week is that 61% of mortgage finance in NSW (Sydney) went to BTL in April, and 6% to first home buyers. We're still a long way from that over here - about 50/50 isn't it?

Also there is now an extreme amount of "chatter" on Australian news sites - at least one or two articles a day on house prices, many of them desperate buuble-denying ramp pieces. I think its getting ready to blow.. and it could be quite spectacular. Having just returned from 10 years down under I keep an eye on there and here, and Sydney is in full-frenzy and, hard to believe though it is, makes London look relatively sane.

Does it not just prove that people who lever up with debt in a time of low inflation are mugs since the burden of repayment is not necessarily less

Edited by stormymonday_2011

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Does it not just prove that people who lever up with debt in a time of low inflation are mugs since the burden of repayment is not necessarily less

Absolutely,I won't argue with that - the problem is a whole generation who don't know any better. It's far, far better to start a mortgage on 17% (with 12% inflation) for the same (or lower) monthly outlay than we have today on a 3% rate and zero (wage) inflation.

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